Lean Accounting and the Basics of Accounting

Accounting scholar A.C. Littleton describes seven key ingredients which led to the creation of accounting systems today. The seven key ingredients include private property, capital, commerce, credit, writing, money and arithmetic. As the economy became more complex is was important that some form of tracking these financial investments was done accurately. Accounting is now a very important aspect to our everyday economy. Without it no business organizations would be able to operate efficiently.

Accounting is the most basic need for every business person, from the operator of a local convenience station to the United States government. To begin we must understand why accounting is such a vital element of everyday business by learning what accounting actually is. Accounting is the system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results. This process helps to identify, measure, and communicate economic information about an organization for the main purpose of making decisions and informed judgments. It is with the accounting records they track the way a business has grown after analyzing figures and are able to suggest the way it should be directed in the future. Many companies’ fortunes are gambled on the advice of their accounting departments.

There are different areas of accounting that may be located within any given organization that include: financial accounting, managerial accounting (cost accounting) and auditing (public accounting). The key difference between managerial and financial accounting is that managerial accounting information is aimed at helping managers within the organization make decisions. In contrast, financial accounting is aimed at providing information to parties outside the organization. Managerial accounting is concerned with the use of economic and financial information to plan and control the activities of an entity and to support the management in planning and decision-making process.

Cost accounting is the subset of managerial accounting and it helps management in determination and accumulation of product, process or service cost. Increased competition and uncertain business conditions have put significant pressure on corporate management to make informed business decisions and maximize their company’s financial performance. In response to this pressure, a range of management accounting tools and techniques has emerged. Cost accounting can be most beneficial as a tool for management in budgeting and in setting up cost control programs, which can improve net margins for the company in the future. Cost accounting helps management in making strategic decisions by identifying an organization’s comparative strengths and weaknesses and a better ways to use, improve or eliminate them.

Why doesn’t standard cost accounting work? Today the trend of many organizations is to reduce their so they have begun to implement some type of lean production/manufacturing objectives whether it is a six sigma program or kaizen philosophy. With the use of lean manufacturing there is recognized improvements with the lead times, on-time deliveries, and scrap rates, however these are not captured anywhere on the generally accepted accounting practices (GAAP) financial statements. These changes usually cause for some initial decline in net income. Even though the decline in net income is usually short lived it would be cause of concern for many executives. The net income decline is because as the company is working through its existing inventory, deferred labor and overhead moving from the asset side of the balance sheet to the expense section of the income statement.

Thus begins a new accounting form: lean accounting. Lean accounting is a concept designed to better reflect the financial performance of an organization that has implemented lean manufacturing processes. These may include organizing costs by value stream, changing inventory valuation techniques, and modifying financial statements to include nonfinancial information. Transactions are to lean accounting what inventory is to lean manufacturing. The waste is the transactions and therefore should be eliminated. As in Kaizen philosophy the key objectives include the elimination of waste, quality control, just-in-time delivery, standardized work and the use of efficient equipment. Lean accounting is simply stated as applying these lean practices of manufacturing to those of the accounting department. This is achieved in the same way waste reduction is achieved in manufacturing through continuously eliminating waste from the processes, reports, and accounting methods throughout the organization. Lean accounting methods make essential information available throughout the entire organization.

The purpose of lean accounting should be to provide accurate, timely,